Supreme Court Holds Inherited IRAs Are Not Asset Protected

Posted By Sarah Kaufman || 24-Jun-2014

For Clients, Advisors and Community.

If you or your parents have an IRA with six figures or more, you need to read this article carefully.

A word of introduction: An “inherited IRA” is an account originally established by Mom or Dad and at the death of Mom or Dad is held for the benefit of son or daughter or grandchild (or other relative). It is typically titled, “Mom or Dad IRA for the benefit of Son or Daughter”. The amount of protection may vary from state to state while the owner of the IRA is alive and it is in his or her name. However, Federal bankruptcy law generally provides some basic protection against creditors and predators.

For a long time, there has been a question whether an inherited IRA was also protected from creditors.

In January 2011, I reported in this blog a Texas case where the court held an inherited IRA was, just like more IRAs and retirement plans, protected against creditor claims.

In June 2013, I reported a case from the Seventh Circuit Appellate Court (the court whose decisions are the law in Northern Illinois and environs) where the court held inherited IRAs were NOT protected from creditor claims. Here, in brief, Heidi Heffron-Clark inherited a $300,000 IRA and later filed bankruptcy. She wanted to keep the IRA. She claimed the inherited IRA was exempt from the claims of creditors. The court ruled against her. The decision was appealed to the Supreme Court of the United States.

In June 2014, the Supreme Court, in a unanimous decision upheld the Seventh Circuit, holding inherited IRAs are not protected from creditor claims. This is a ruling that has immense impact for us today.

So, a retirement plan account or IRA in the hands of Mom or Dad is protected from creditors. But, that same account once inherited is not protected.

Is there a way to make sure that an inherited IRA remains protected against creditors?

The answer is yes. The interest of a beneficiary in a trust created by a third party (with certain provisions) can be exempt from the attack of creditors. Naming a special retirement trust as beneficiary of the IRA proceeds will restore creditor protection.

Individuals with an IRA account of six figures or more should reconsider the beneficiary structure and should consider a trust based beneficiary arrangement for the next generation. This will limit the risk of creditor attack.

There are more than taxes to consider when planning for your retirement. For most families, a retirement plan or IRA will be one of the largest assets. With proper planning, it can provide a legacy for multiple generations. This requires thought and consideration at the planning stage. When reviewing your estate plan, you should consider the potential benefits of a special retirement trust to proect your family.

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